Lunch is for wimps: disclosure and transparency in the quoted real estate sector
Some years ago I hosted a series of lunches with City real estate sector analysts to discuss the quality of disclosure of the companies they analysed. This generosity was prompted by poor disclosure being an issue that regularly reared its ugly head in the press and amongst investors.
Over the years the sector had built up a bit of a reputation for poor transparency, with secretive leadership often reluctant to share information and a valuation regime which was long on opinion and short on verification. Of course, this wasn’t helped by the sector being occasionally accident prone and subject to extreme financial crises, often leading to value-shrinking emergency fund raisings and property fire sales.
Somewhat counter-intuitively, real estate sector companies are regular winners of investor relations and communications awards. At the time, this almost certainly reflected good relative share price performance when other sectors performed much worse. And it certainly reflected the sociability of company leadership and the generally high standard of the in house comms teams that interact with the investment community.
What the awards seemingly didn’t reflect is good disclosure, as the analysts happily identified a long wish-list of possible improvements, which included for example:
- more information about companies’ future strategies (as opposed to merely historic data about past performance which takes up most reporting);
- more clarification around which portfolio assets were creating value and which were a drag on performance;
- financial and operating risks should be more clearly identified and reported on in annual reports;
- more disclosure was sought on financing and banking facilities, and more granularity on voids and tenant profiles;
- there was an appetite for more news flow and trading updates;
- half yearly rather than just annual valuations were to be expected (and produced by independent surveyors not involved in the provision of any other property services to the client).
Of course many of these wishes have been delivered over the last five years, whether voluntarily or as a result of changing regulation. For example, the EU Transparency Directive led to mandatory interim management statements, effectively introducing quarterly financial reporting; and the launch of the real estate investment trusts regime (REITs) required comprehensive disclosure from those companies that converted, many of whom had been very secretive.
What the lunches therefore showed is that it is not necessarily a cause for rejoicing to win awards for good comms and investor relations as the awards may not actually be an endorsement of a company’s disclosure and transparency. That’s much harder to earn.